South Asia Agricultural trade liberalisation in the Uruguay Round: implications for Sri Lanka Prema-Chandra Athukorala and Saman Kelegama STATE LIBRARY OF N.S.W. GENERAL REFERENCE LIBRARY N382.095493 2 Research School of Pacific and Asian Studies 4;)~••• Enquiries The Editor, Working Papers Economics Division Research School of Pacific and Asian Studies The Australian National University Canberra 0200 Australia Tel (61-6) 249 4700 Fax (61-6) 257 2886 The Economics Division encompasses the Department of Economics, the National Centre for Development Studies and the Australia-Japan Research Centre from the Research School of Pacific and Asian Studies, the Australian National University. Its Working Paper series is intended for prompt distribution of research results. This distribution is preliminary work; work is later published in refereed professional journals or books. The Working Papers include work produced by economists outside the Economics Division but completed in cooperation with researchers from the Division or using the facilities of the Division. Papers are subject to an anonymous review process. All papers are the responsibility of the authors, not the Economics Division. conomics Division Working Papers South Asia Agricultural trade liberalisation in the Uruguay Round: implications for Sri Lanka Prema-Chandra Athukorala and Saman Kelegama cntr- Research School of Pacific and Asian Studies •;I~••• © Economics Division, Research School of Pacific and Asian Studies, The Australian National University, 1996. This work is copyright. Apart from those uses which may be permitted under the Copyright Act 1968 as amended, no part may be reproduced by any process without written permission from the publisher. Published by the National Centre for Development Studies Printed in Australia by Better Printing Service, 1 Foster Street, Queanbeyan, NSW, 2620. The Economics Division acknowledges the contribution made by the Australian Agency for International Development (AusAID) towards the publication of this working paper series. ISBN 07315 2329 6 ISSN 1038-412X Key to symbols used in tables n.a. Not applicable Not available Zero Insignificant Prema-Chandra Athu.korala is a Senior Fellow in the Department of Economics and theAustralia South Asia Research Centre, Research School of Pacific and Asian Studies, The Australian National University. He has been a consultant to the World Bank, ILO, ESCAP and the Government of Sri Lanka and has published extensively in the fields of trade policy reforms, macroeconomic policy, foreign investment and international labour migration. Saman Kelegama is the Executive Director of the Institute of Policy Studies, a prominent independent think tank in Sri Lanka. His research interests include foreign direct investment, privatisation and trade policy reforms. He has published widely on various aspects of the Sri Lankan economy. STAlE LIBRARY OF N.S.W. L I/ 1996 • ii • Economics Division Working Paper abstract Over the past three decades Sri Lanka has made significant progress in undoing a legacy of import-substitution policy pursued vigorously during the first three decades following political independence in 1948. Indeed, in terms of both continued commitment to market-oriented reforms and the significant economic gains achieved from this commitment, the Sri Lankan experience is remarkable in the developing world. These developments notwithstanding, both high tariffs and quantitative restrictions remain important deterrents to import trade in agricultural goods. The net direct impact of implementation of the market access provisions of the Uruguay Round by other countries on Sri Lanka's agricultural trade is likely to be negligible. The direct impact on existing trade patterns is, however, only one aspect of an assessment of the overall impact of the Round on a given member country. What is more important is the potential benefit emanating from significant achievements of the Round in improving the rules for world agricultural trade and ensuring the transparency of such rules. These achievements imply setting the stage for a positive shift in the production possibilities faced by individual agricultural producing countries through opening up new market opportunities. A small open economy like Sri Lanka certainly has a strong and direct interest in the world economy and its trading rules. South Asia 96/ 2 • iii • gricultural trade liberalisation in the Uruguay Round: " implications for Sri Lanka Uruguay Round-a turning point The Uruguay Round Agreement on Agriculture (URAA) marks a turning point in the regulation of international trade in agricultural goods. More than four decades after the GAIT was inaugurated, the agricultural sector is now included in the mainstream GAIT /WTO rules. Even though the degree of liberalisation finally achieved under URAA tariff bindings has fallen well short of original expectations, the Round has clearly succeeded in establishing a rule-based trading system for agriculture. Through the establishment of a multilateral framework for the discipline of agricultural trade and the achievement of transparency in trade restrictions through the tariffication process, a firm foundation has now been laid for further liberalisation (Cline 1995; Rayner et al. 1993; Martin and Winters 1995). In order to build on this promising start, it is vital to broaden our understanding of the trade policy-making process in developing countries and the constraints, both perceived and real, faced by these countries in their attempts to comply with new URAA rules. This paper aims to contribute to this end through a case study of Sri Lanka. The paper begins with a description of the agricultural sector in the Sri Lankan economy. The following section provides an account of current agricultural production and trade policies while paying attention to their roots in Sri Lanka's economic policy history and the related socio-political considerations. The fourth section is the core of the paper and examines Sri Lanka's URAA commitments to date and the constraints to further compliance with URAA provisions, and assesses of the impact of the URAA South Asia 96/2 • 1 • PREMA-CHANDRA ATHUKORALA AND SAMAN KELEGAMA on world agricultural trade from the perspective of global trading opportunities for Sri Lanka. The final section draws out the implications of the URAA for Sri Lanka. Agriculture in the Sri Lankan economy Despite significant structural transformation over the past three decades, the agricultural sector still constitutes a fifth of GDP in Sri Lanka (Table 1). It provides employment to about 40 per cent of the labour force, surpassing the contribution of any other major sector. About 65 per cent of the country's population is largely dependent on agriculture for their livelihood. Within the agricultural sector, the output share of plantation agriculture (tea, rubber, coconut and related processing activities), the mainstay of the classical export economy of Sri Lanka, has declined sharply. In terms of the relative contribution to GDP, non-plantation agriculture is over four times of that of the plantation agriculture. Table 1 Sectoral composition of domestic product of Sri Lanka (per cent) 1970-71· 1980-81· 1993-94• Agriculture, forestry and fishing 35.06 33.66 26.06 Agriculture 32.49 28.94 21.23 Plantation agriculture 15.80 13.95 5.77 Tea 3.21 2.63 1.40 Rubber 1.77 1.40 0.55 Coconut 4.05 3.80 1.93 Processing of tea, rubber and coconut 6.77 6.12 1.89 Non-plantation agriculture 16.69 14.99 15.46 Paddy 7.21 6.09 4.39 Other 9.48 8.90 11.07 Forestry 1.36 1.97 2.13 Fishing 1.21 2.75 2.69 Industries 16.98 23.55 24.03 Manufacturing' 9.88 11.62 13.42 Services 47.96 42.79 49.91 Total 100 100 100 • two-year average. b Excluding processing of plantation products (tea, rubber and coconut). Source: Compiled from Central Bank, Annual Report (various issues). • 2 • Economics Division Working Paper AGRICULTURAL TRADE LIBERALISATION: IMPLICATIONS FOR SRI LANKA The land area under cultivation of tea, th main agricultural export, is about 222,000 hectares. Over 55 per cent of this land is covered by state-owned plantations, while the remainder is held by smallholders with less than 20 hectares. Coconut and rubber, which cover 416,000 and 191,000 hectares respectively, are predominantly smallholder crops. More than 90 per cent of Sri Lanka's tea production, 65 per cent of rubber production and 17 per cent of coconut production is exported. Paddy (rice), the main staple crop, accounts for about a third of the share of non­ plantation agriculture in GDP. The area under paddy cultivation is 930,000 hectares or 45 per cent of the total area under agriculture. The majority of farmers in the paddy sector are small-scale producers-more than 70 per cent of paddy holdings are less than one hectare and only about 5 per cent have a holding size greater than two hectares. The rice sector employs about half of the total agricultural labour force which is about 20 per cent of the total labour force. Rice accounts for approximately 25 per cent of the consumer goods basket, about three-quarters of total grain consumption and 45 per cent of calorie intake in the country. Nearly 90 per cent of the total domestic rice requirement is now met from local production. The other non-plantation crops include subsidiary food crops such as maize, pulses, chillies, onions and potatoes, and a range of tree-crops such as cinnamon, cardamon, coffee, cloves, pepper and arecanut (betel- Table 2 Main agricultural crops, 1994 Area under Government Export- Import culltivation• ownershipb output ratio penetration ('000 ha) (%) (%) ratio (¾)c Tea 222 (10.8) 55 94.8 Rubber 192 (9.3) 15 65.8. Coconut 416 (20.2) 4 16.7 Minor export crops 75 (3.7) 55.0 Paddy 930 (45.2) 0 12 Sugar 13 (0.6) 20 83 Minor food crops 21 (10.2) 0 1.5 15 • Share in total cultivated land is given in brackets.